September 2, 2019 / 12:16PM / By Yves Mersch, ECB /
Header Image Credit: Facebook
Being a speech by
Yves Mersch, member of the Executive Board of the ECB, at the ESCB Legal
Conference, Frankfurt Am Main, 2 September 2019
1787, during the debates on adopting the US Constitution, James Madison stated
that "the circulation of confidence is better than the circulation of money".
It's telling that Madison chose to use public trust in money as the yardstick
for trust in public institutions - money and trust are as inextricably
intertwined as money and the state. Money is an "indispensable social
convention" that can only work if the public trusts in its stability and
acceptability and, no less importantly, if the public has confidence in the
resolve of its issuing authorities to stand behind it, in bad times as well as
18th century remark on the link between money and trust has lost none of its
relevance in the 21st century. The issue of trust in money has resurfaced in
the public debate on privately issued, stateless currencies, such as bitcoin,
and their promise to serve as reliable substitutes for public money. Today's
conference is neither the place nor the time for me to repeat my past
statements on the shortcomings of cryptocurrencies and
why they do not fulfil the basic tests of what constitutes "money".
I will today talk about Libra, Facebook's newly announced private currency. It
is scheduled for release in the first half of 2020 by the very same people who
had to explain themselves in front of legislators in the United States and the
European Union on the threats to our democracies resulting from their handling
of personal data on their social media platform.
are three key questions here. First, how does Libra differ from other
private currencies and from public money? Second, what legal and
regulatory challenges does it pose? And third, in the light of its
mandate, what position should a central bank like the ECB take towards Libra?
remainder of my speech will be dedicated to these three questions, not with a
view to conclusively answering them, but merely to raise awareness of some of
the risks of Libra, to question its main premises and, in the process, to
highlight the perils of entrusting the smooth processing of payments, the
savings of citizens and the stability of the global monetary and financial
systems to unaccountable private entities with a questionable track record in
matters of trust.
me turn to my three questions.
First, how is Libra different from other
private currencies and from public money?
the hype surrounding it, Libra is, in some respects, no different from other,
established private currencies. Similar to cryptocurrencies, Libra will be
issued through a public ledger running on a form of blockchain technology. And
similar to e-money, Libra will be distributed to end users electronically in
exchange for funds denominated in fiat currencies.
there are some notable differences that are extremely concerning. Libra's
ecosystem is not only complex, it is actually cartel-like. To begin with, Libra
coins will be issued by the Libra Association - a group of global players in
the fields of payments, technology, e-commerce and telecommunications. The
Libra Association will control the Libra blockchain and collect the digital
money equivalent of seignorage income on Libra. The Libra Association Council
will take decisions on the Libra network's governance and on the Libra Reserve,
which will consist of a basket of bank deposits and short-term government
securities backing Libra coins. Libra-based payment services will be managed by
a fully owned subsidiary of Facebook, called Calibra. Finally, Libra coins will
be exclusively distributed through a network of authorised resellers,
centralising control over public access to Libra. With such a set-up, it is
difficult to discern the foundational promises of decentralisation and
disintermediation normally associated with cryptocurrencies and other digital
currencies. On the contrary, similarly to public money Libra will actually be
highly centralised, with Facebook and its partners acting as quasi-sovereign
issuers of currency.
be wondering what the problem is with Libra's centralisation. If public money
is also centralised, why should Libra be any different?
the advocates of Libra and other private currencies conveniently gloss over is
that, because of its nature as a public good, money has traditionally been an
expression of state sovereignty. It is no coincidence that, throughout history,
sovereign actors have underpinned all credible and durable currencies. This
historical fact, affirmed in G.F. Knapp's state theory of money and in the
Chartalist school of economic thought, has had a lasting impact on orthodox
perceptions of the concept of money as a public good and has found its way into
statutory definitions of legal tender.
comes to money, centralisation is only a virtue in the right institutional
environment, which is that of a sovereign entity and a central issuance
authority. Conglomerates of corporate entities, on the other hand, are only
accountable to their shareholders and members. They have privileged access to
private data that they can abusively monetise. And they have complete control
over the currency distribution network.
can hardly be seen as repositories of public trust or legitimate issuers of
instruments with the attributes of "money".
high degree of centralisation that is Libra's hallmark, and the concentration
of its issuance and distribution networks, are not the only features inhibiting
trust. Despite its audacious global currency aspirations, Libra lacks a global
lender of last resort. Who will stand behind it in a liquidity crisis
situation? Libra is also devoid of the equivalent of a deposit guarantee scheme
to protect its holders' interests during a crisis. Moreover, the limited
liability of the Libra Association members raises serious questions about their
resolve to satisfy the claims of Libra holders with their full faith and
credit, as central banks do with public money. Finally, the fact that Libra is
backed by a basket of sovereign currency-denominated assets appears to defeat
the very purpose of its issuance as a private currency. Why bank on a proxy
when one can put one's trust in the genuine article? And how will the potential
volume of payment transactions settled in Libra affect the monetary aggregates
of its underlying currencies, their objectives and intermediate targets?
Let me now turn to my second question, on some
of Libraâ€™s legal and regulatory challenges.
straddling the divide separating currencies from commodities and payment
systems, digitalised private currencies inevitably raise legal and regulatory
questions. Libra is no exception. To keep my speech short, I will only address
three of these challenges, but rest assured that there are many more.
first challenge concerns Libra's fundamental legal nature. The choice is,
essentially, whether to treat Libra as e-money, as a financial instrument or as
a virtual currency. Libra does not appear to qualify as e-money, as it does not
embody a claim of its holders against the Libra Association. If Libra were to
be treated as a transferable security or a different type of financial
instrument, both the Libra Association and any other entities engaged in providing
investment services through Libra coins would fall within the remit of the
Markets in Financial Instruments Directive (MiFID II). Alternatively, if Libra
were to qualify as a virtual currency then, under the Fourth Anti-Money
Laundering Directive, both Calibra and its authorised resellers would become
subject to the Directive's anti-money laundering and counter-terrorism
financing obligations, and to its registration requirement. Given the different
regulatory implications of Libra's legal characterisation, regulatory
intervention is essential, to either confirm Libra's classification under one
of the existing legal and regulatory frameworks, or to create a dedicated
regime adjusted to its specificities.
second challenge is to ensure that the relevant EU and Member State regulatory
and supervisory authorities can assert jurisdiction over Libra and its network.
But how can this be done when the entities behind Libra are located outside the
EU? One way would be to require national custody of a share of the Libra
Reserve funds equivalent to the amount of Libra in circulation in any given EU
Member State. But there may be other ways to ensure effective public control
over Libra and its network, and these are worth exploring. Ensuring that
payment systems are safe and accessible and exercising control over the
financial market infrastructures that underpin our economies will remain public
good objectives. And the conditions under which collateral or settlement
finality are accepted will remain prerogatives of the regulatory or legislative
third challenge is the need for cross-border cooperation and coordination.
Because Libra will be used across borders, it is a matter of international
interest. Its global nature would also call for a global regulatory and
supervisory response to avoid regulatory arbitrage, ensure consistency of
outcomes and guarantee the efficiency of public policy responses to Libra.
There are welcome signs that the global community is already working together
to mitigate Libra's risks. Both the G7 and the Committee on Payments and Market
Infrastructures have evaluated Libra, with an emphasis on its potential use in
money laundering and terrorist financing. Further work is expected by the G20,
the Financial Stability Board and other fora with a stake in the stability of
the global monetary and financial system.
Finally, I would like to say a few words about
the ECBâ€™s general stance towards financial innovations such as Libra.
ECB's Treaty-based tasks include defining and implementing the single monetary
policy and promoting the smooth operation of payment systems. In the context of
monetary policy, the ECB takes a close interest in market innovations that
could directly or indirectly affect the Eurosystem's control over the euro or
shift some of its monetary policy to third parties. Depending on Libra's level
of acceptance and on the referencing of the euro in its reserve basket, it
could reduce the ECB's control over the euro, impair the monetary policy
transmission mechanism by affecting the liquidity position of euro area banks,
and undermine the single currencyâ€™s international role, for instance by
reducing demand for it.
context of the smooth operation of payment systems, the ECB takes a close
interest in market innovations that seek to replace the euro with alternative
settlement currencies or create new and autonomous payment channels. Although
some of Libra's aims are legitimate, reductions in cross-border fund transfer
costs and other efficiency gains can also be obtained through established
instant payment solutions. The Eurosystem recently launched the TARGET Instant
Payment Settlement service, or TIPS - a pan-European, 24/7 settlement service
for instant payments. By operating in central bank money, and by being embedded
in TARGET2, TIPS provides a high-performance payment solution that is safer and
more economical than questionable, market-based retail payment innovations.
Let me conclude here.
field of money, history bears testament to two basic truths. The first is that,
because money is a public good, money and state sovereignty are inexorably
linked. So the notion of stateless money is an aberration with no solid
foundation in human experience. The second truth is that money can only inspire
trust and fulfil its key socioeconomic functions if it is backed by an
independent but accountable public institution which itself enjoys public trust
and is not faced with the inevitable conflicts of interest of private
various forms that money has taken throughout history, those that have best fulfilled
their purpose and proven the most credible have invariably benefited from
strong institutional backing. This backing guarantees that they are reliably
available, that their value is stable and that they are widely accepted. Only
an independent central bank with a strong mandate can provide the institutional
backing necessary to issue reliable forms of money and rigorously preserve
public trust in them. So private currencies have little or no prospect of
establishing themselves as viable alternatives to centrally issued money that
is accepted as legal tender.
stance of central banks towards modern forms of money is bound to evolve with
time, and central bankers have embraced technological developments in the field
of money and will continue to explore helpful new innovations. But the rise of
cryptocurrencies and other forms of privately issued instruments that can only
fulfil some, but not all, of the functions of money is unlikely to
fundamentally upset the two truths I just described. If anything, it will serve
as a useful reminder of central banks' pivotal role as responsible stewards of
public trust in money, and stress the need for vigilance towards phenomena
capable of undermining public trust in the financial system.
sincerely hope that the people of Europe will not be tempted to leave behind
the safety and soundness of established payment solutions and channels in
favour of the beguiling but treacherous promises of Facebook's siren call.
See Mersch, Y. (2018), "Virtual or virtueless? The evolution of money in the
digital age", lecture at the Official Monetary and Financial
Institutions Forum, London, 8 February.
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